Currently, several FTSE 250 shares are selling at a bargain because prices have been falling for a while. This presents the perfect opportunity to build a portfolio of cheap growth shares that pay high dividends. Regular dividend payments help to compound my gains, paying me extra on top of the returns I make from any increases.
To get the most out of my investment, I’d use a Stocks and Shares ISA. This allows me to invest up to £20,000 a year without having to pay any tax on my capital gains.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Picking the right stocks
While the FTSE 100 lists several large, reliable stocks, I often find more value in the FTSE 250. But I don’t just choose stocks with the highest yield. For example, Diversified Energy Company boasts a 30% dividend yield but earnings are forecast to decline at 81% for the next three years. That would likely bring down the share price, negating any dividend returns I might make.
I think a better option would be OSB Group (LSE:OSB), a UK-based mortgage and retail savings firm. With a 7% yield and a share price estimated at 76% below fair value, OSB Group earnings are forecast to grow at 15% per year. What’s more, the general consensus among analysts estimates a share price increase of 54% in the next 12 months. Of course, analysts can get it wrong!
Down 24% over the past year, I believe OSB Group is a promising £1.7bn small-cap player with decent growth potential. But I’d keep an eye on debt – at 282%, OSB’s debt-to-equity (D/E) ratio is a risk factor that the firm will need to address in next month’s earnings report.
All shares come with risks, which is why it’s important to build a diversified portfolio. By mixing some riskier high-yield shares with reliable low-yields, I should achieve an average 6% dividend returns.
Other FTSE 250 dividend shares I’d consider include Bank of Georgia, NextEnergy Solar Fund, and TP Icap. I would aim for at least 20 stocks across various industries to improve my chances of receiving reliable returns.
My estimation
Based on a portfolio of dividend shares with an average 6% yield, I’ve calculated I could reach my goal in just over 20 years.
My calculations include an estimated 7% annual price increase based on the compound annual growth rate of the FTSE 250 index. It’s generally considered the type of returns the average investor can expect from a well-selected portfolio of shares.
By investing £300 a month into my ISA and adopting a dividend reinvestment plan (DRIP) to compound my returns, I could reach £506,700 after 23 years. This is a good timeline for somebody under 40 saving for a comfortable retirement.
Of course, this is just an example of a possible scenario based on historical averages. If I pick bad stocks, I could lose some or all of my investment. The key to successful investing is developing a strategy and sticking to it, even through the tough years.
